Effects of Raising the Minimum Wage on the Economy

Will It Help Americans — Or Kill Jobs?

The minimum wage has become the hot-button political and economic issue of this year. President Obama has made raising the minimum wage incrementally from the current $7.25 to $10.10 an hour one of his key priorities, claiming it will help decrease income inequality in the U.S. Most Democrats and some economists agree with him.

On the other side of the aisle are most Republicans and many other economists who claim that raising the minimum wage will result in fewer low-wage jobs and higher business costs, which companies will pass on to consumers in the form of higher prices.

CBO Report Straddles the Fence

So which argument is right? A non-partisan Congressional Budget Office (CBO) report released in February that studied the potential impacts of raising the minimum wage to $10.10 an hour gave some ammunition to both sides.

Those opposed to a minimum wage increase were quick to point to the report’s finding that it could reduce total employment in the U.S. by up to 500,000 jobs. Those in favor of a minimum wage hike, meanwhile, trumpeted its finding that such an increase would increase weekly earnings for 16.5 million low-wage employees and raise 900,000 people above the poverty line.

There are plenty of studies that can be cited by those on both sides of the argument to support their position. However, two economists examined a wide range of different studies and concluded that the evidence in total supports the argument that raising the minimum wage hurts low-wage employment.

Another potential impact of raising the minimum wage that opponents point to is the possibility that it could result in more experienced employees staying in low-wage jobs longer. This could block many young and inexperienced people from entering the workforce by taking these minimum wage jobs. Many opponents of raising the minimum wage believe that a better strategy is to invest these resources in more education and job training programs.

Proponents, meanwhile, point out that the CBO report also says raising the minimum wage could translate into increased spending and economic activity as more money is put into the hands of consumers. Specifically, they project that raising the minimum wage to $8.50 per hour will inject another $9.5 billion into the economy, while a raise to $10 will inject $60 billion, all over two years. While political opponents counter that there is no proof low-wage workers will actually spend this money, the consensus among economists is that low-wage earners will spend the additional money they receive.

What else do economists have to say about a minimum wage hike? The University of Chicago’s Booth School of Business conducted a survey among three dozen top U.S. economists last year asking them whether they thought raising the federal minimum wage to $9 per hour and indexing it for inflation is desirable economic policy. Almost half (47 percent) said yes, 11 percent said no, and 35 percent were uncertain.

But What Is Fair?

Economic arguments aside, many proponents believe that a minimum wage increase is simply the fair thing to do. After all, it was introduced as part of the Fair Labor Standards Act of 1938.

It is important to note that the minimum wage is not indexed for inflation like some government programs. Therefore, the buying power of someone earning the minimum wage decreases over time if it is not raised by the federal government. One economist calculated that in today’s dollars, the minimum wage is currently lower than it was in 1968, when it was $9.40 in current dollars.

Unfortunately, there is not a clear-cut answer to the question of whether raising the minimum wage will help Americans or kill jobs. There is evidence to support both sides of the argument. The only thing that appears certain is that the debate will continue hot and heavy at least through the midterm Congressional elections this year.

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"... raising the minimum wage to $8.50 per hour will inject another $9.5 billion into the economy," Gotta love magic money. We just print more and suddently everyone is rich ! Poverty is gone !
Does anyone that believes raising the minimum wage somehow makes people richer realize that to get wealth you actually need to produce something ?
If this idea of changing the minimum wage somehow leads to more wealth in our economy, why not just print lots of money and hand it out. There ! No more poverty !